While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Mad Hedge Hot Tips
December 18, 2018
Fiat Lux
The Five Most Important Things That Happened Today
(and what to do about them)
1) Some 90% of Global Asset Classes Are Now in Bear Markets. This could be the year that NO ONE made money. Good thing I’m Up 30%! Click here.
2) The Fed Is Pulling $50 Billion a Month Out of the Financial System. And you wondered why stocks were going down? Click here
3) Federal Budget Deficit Hits All-Time High in November. Look for the deficit to hit $1.3 trillion next year when entitlements are added in. Ramping up borrowing at the top of the economic cycle is financial suicide. At least the stock market thinks so. Click here.
4) The Auto Industry Expects Sales to Drop to a 5-year Low in 2019, according to the National Association of Automobile Dealers. No wonder investors have been avoiding the shares like the plague! Click here.
5) Only 53% of CEOs are Increasing Capital Spending in 2019, says a survey from the Chief Executive Group. Maybe that’s what the market has been trying to tell us by doing a Dotcom Bust 2.0. Click here.
Published today in the Mad Hedge Global Trading Dispatch and Mad Hedge Technology Letter:
(THE CHRISTMAS RALLY GOT STOPPED AT THE BORDER),
(THE PASSIVE/AGGRESSIVE PORTFOLIO),
(ROM), (UYG), (UCC), (DIG), (BIB), (UGL), (UCD), (TBT),
(THE BIG TECHNOLOGY TRENDS OF 2019)
(MSFT), (AMZN), (BBY), (SONO), (ROKU), (ADBE), (AAPL), (BAC)
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
December 18, 2018
Fiat Lux
Featured Trade:(THE CHRISTMAS RALLY GOT STOPPED AT THE BORDER)
(TLT), (TSLA), (AAPL)
(THE PASSIVE/AGGRESSIVE PORTFOLIO),
(ROM), (UYG), (UCC), (DIG), (BIB), (UGL), (UCD), (TBT)
On Sunday, I spent 30 minutes driving around looking for a parking space at Target. Once there, I waited for another half hour while the people in front of me paid for their entire Christmas shopping for the year. You can’t get a restaurant reservation anywhere.
With economic conditions this strong, you would think the stock market would be booming, soaring to new highs daily.
It’s not. In fact, as I write this, the Dow Average is now down 5% in 2018 and off a gut-punching 13% since the beginning of October. Two-month support was shattered yesterday.
In fact, stocks have just suffered their worst quarter in a decade. Technology shares, in particular, have taken the biggest hit since the 2000 Dotcom Bust. We have in effect seen Dotcom Bust 2.0.
I warned readers for years that the top of this bull market may not be defined by any particular economic or geopolitical event. The sheer weight of prices could do it. Some 2 ½ months into a horrific meltdown and it looks like that is what happened. I’ve lost count of the 600 points downdrafts in recent weeks.
All of which I find extremely annoying as I missed one of the greatest short selling opportunities of all time. I feel like such an idiot. I did get off a few shorts. My Tesla short (TSLA) is going gangbusters but I still love the company long term. The bond market (TLT) remains my new rich uncle, writing me generous checks monthly.
The reason I didn’t go short more aggressively is that the risk of a China trade deal was always looming on the horizon. When it happens, markets could rocket 10%. But nine months into the trade war, and it still remains way out there on the horizon. Wasn’t it General Douglas MacArthur who said the US should never get involved in a land war in Asia?
Of course, the reasons are all crystal clear with 20/20 hindsight. The Federal Reserve giveth, and Federal Reserve taketh away. While global liquidity was exploding, stocks could only go one way, and that was up. Fortunately, I was one of the early ones to figure this out. But then, I took former Governor Janet Yellen’s class at UC Berkley.
Now, everywhere you look liquidity is disappearing. The US government will run a $1 trillion budget deficit in 2019. Add in entitlements and that balloons to $1.3 trillion.
The Fed is sucking out another $600 billion next year as part of its quantitative tightening, the long-advertised QE unwind. Did I mention that the Fed has raised interest rates six times in three years and will raise again once more on Wednesday?
As I peruse my charts and run the numbers on possible options combinations, the number of “screaming buys” almost can’t be counted. Apple (AAPL), for example is looking at a potential $10 of downside versus $170 of upside on a five-year view.
But you know, sitting on your hands seems to be working for everyone else. I think I’ll give it a try. It is far easier to buy them on the way up than catch a falling knife. Sure, I’m unchanged on the quarter, but unchanged is not what I’m all about. I think I’ll just lock in my 30% return this year and call it a year. I’ll be a hero again in 2019.
Mad Hedge Technology Letter
December 18, 2018
Fiat Lux
Featured Trade:
(THE BIG TECHNOLOGY TRENDS OF 2019)
(MSFT), (AMZN), (BBY), (SONO), (ROKU), (ADBE), (AAPL), (BAC)
As an astute purveyor of technology, it is my job to share with you the upcoming tech trends of 2019.
Some might be easily discernable and some might be a headscratcher, but all must be tabbed up and considered in the current tech outlook that is unpredictable and fluctuating, to say the least.
Part of the moody tech sentiment has been influenced by a changeable macro landscape - the tech sector’s winter freeze was woefully volatile and unfairly capsized good companies with the bad.
There is no means to get around it – the administration's delicate situation as it relates to Beijing and the American tech sector is front and center, and any movement of tech stocks must carefully absorb the ongoings from this complicated relationship.
The number of obstacles that confront this sensitive situation means that the 90-day window granted to solve the trade quagmires appear too brief of a timeframe to really knock out every single disagreement on the table.
The uncertainty over trade policy has really ruffled some of tech’s strongest feathers such as America’s pride and joy Apple (AAPL).
Apple is a great long-term story, but it does not preside over many short-term positive catalysts that can resuscitate the stock.
Analysts' downgrade after downgrade has been most harrowing for the chip components that make up Apple and other consumer electronic devices such as televisions and tablets.
This scenario is expected to extend into 2019 with Bank of America Merrill Lynch (BAC) slashing their price target by nearly 30% on electronics retailer Best Buy (BBY) then sticking the fork in them by downgrading it to underperform.
The premise behind this downgrade was that Best Buy carved out 25% of revenue from television sales and even though Adobe (ADBE) analytics has calculated record online sales in the holiday season, the follow-through has largely been without television sales participating in the seasonal bonanza.
Piggybacking on this trope, I believe electronic device sales could be hard-pressed to eke out growth next year and are set up for a rude awakening.
Therefore, it is sensible to extrapolate this idea out and assume that smart hardware competing against the big boys such as smart speaker firm Sonos (SONO), who I urged readers to stay away at $16 in September, is set up for a painstaking 2019.
To reread the story, please click here.
The stock is now trading at $11 and a mix of weakening consumer device demand layered with the domination that is the Amazon Alexa has pushed up this company’s risk-reward levels to untold heights.
Rounding out the negatives is that content streaming platform Roku has also debuted its own version of a smart speaker.
Roku (ROKU) is one of my favorite long-time tech plays but has been dragged down by the broader trade war because a portion of its revenue is still captured by hardware such as the new speakers and Roku OTT boxes.
Differing from Apple, Roku earns most of their revenue from targeted ads on their proprietary platform, and this is its reason why most investors are in this stock that is set to capture a secular migratory wave of cord-cutters traversing to online streaming.
However, Roku TVs made by Chinese company TCL still draw in small portion of revenue and even though the China revenue is not as high on a relative basis as Apple’s 20%, the stock has floundered in the short-term.
If disruptors such as Roku can get hit savagely with a small portion of revenues from China, then I am convinced that any tech investor going into 2019 should stay away from hardware and hardware that is made in China.
The consensus is that the drawn-out trade war could become the X-factor in the 2020 election because the Chinese are willing to wait for the next guy on the carousel searching for a better deal.
If you thought Chinese supply chains had a tough time of it in 2018, then 2019 is poised to be even more treacherous.
What 2018 convincingly demonstrated was that the late economic price action is getting into later and later stages boding negative for tech stocks.
To construct a healthy tech portfolio going into 2019, the change in the tech partiality has made the pivot towards software much more important.
Investors need to mitigate Chinese supply chain risk and seek out domestic software plays.
That should be the playbook as tech investors are on pins and needles going into the new year.
The domestic economy is robust and tech investors should be attracted to top-quality cloud-based enterprise stocks that are profitable.
The FANG story collapsing in our face signaled to investors that it is time to cautiously consider whether to invest heavily into deep loss-maker tech growth stories.
A healthy rotation to premium quality tech with superior cash flow is one way to lock up stocks and slyly deflect the external factors shaking up the tech momentum.
PayPal (PYPL) is a stock that has large international exposure mainly in Europe, but none in China whose 3-year EPS growth rate is 26% and still driving sequential sales in the mid-20% range.
This is just one example of a stock that has the correct make-up in a harsh and brutal tech environment planted with invisible booby traps.
And the most tell-tale sign that the American economy is in for an all-out software frenzy is the number of head-spinning investments from big tech companies looking to expand their footprint into new talent spots around the country.
First, the farcical Amazon beauty pageant came to an end with the e-commerce giant announcing a three-part package deploying new operations in New York, Washington D.C., and Nashville as the next phase of digital growth ramps up.
Google (GOOGL) followed that up by plopping a software office in New York City devouring a huge chunk of the Chelsea neighborhood aimed at doubling the 7,000 employees already there.
Then it was Apple’s turn choreographing a significant investment in Austin, Texas that will cost them $1 billion along with juicing up operations in Seattle, San Diego, and Los Angeles.
They weren’t finished there and promised to double down its presence in Pittsburgh, New York and Boulder, Colorado over the next three years.
It’s clear that big tech has finally understood that it’s not invincible and milking the China supply chain for all its worth is now a taboo business practice that has bipartisan support firmly against it.
Like I said before, the trade war came 1-2 years too early for Apple, and these headline-grabbing talent investments in data centers and its staff underscore the sense of urgency to fully and comprehensively pivot towards a software and services company.
The transition has certainly been an excruciating process exposing the weak spots at a brilliant company at the worst possible time.
I blame CEO of Apple Tim Cook who is the operations expert in the building grappling with Apple overextending themselves in the Middle Kingdom that has come back to haunt him at night.
You would have thought that with the troves of big data on their hands, Apple’s consultants might have found a country allied with America to invest in such a massive supply chain.
This leads me to communicate with conviction that Microsoft (MSFT) is my favorite tech stock going into 2019 because it is the purest, scalable, high-quality software name with minimal hardware drag devoid of weak spots in its armor.
That was what the investment in GitHub for $7.5 billion was about, highlighting the value of owning the meeting place for coders, literally buying up a stash of over 28 million users and 57 million coding repositories in which 28 million are public.
Microsoft has also bought up six video game studios in 2018 attempting to capture a bigger piece of the pie for the video game market that has been throttled by Fortnite.
If the Microsoft baby gets thrown out with the bathwater, then the tech bear market is upon us in full force.
If you didn’t really believe content is king in 2018, then you will really feel the phenomenon further embedded into the economy and society in 2019.
Next year, almost all tech investments will result in more data centers and software engineers in the hope of pumping out the best content and data, whether it’s enterprise software, video games, or pure data storage.
In 2019, I am bullish on companies with a cloud-based bedrock able to grind out the best content in the world, backed by a strong balance sheet that dovetails nicely with a lack of China-based revenue exposure.
The uber-growth models could be taking a rest boding negatively for Uber, Lyft, and Airbnb who must convince a more skeptical tech audience with tighter purse strings as they inject yet another unique dimension into the tech world next year.
What if you want to be a little more aggressive, say twice as aggressive?
What if markets don’t deliver any year on year change as they have done many times in the past?
Then you need a little more juice in your portfolio, and some extra leverage to earn your crust of bread and secure your retirement.
It turns out that I have just the solution for you.
This would be my “Passive/Aggressive Portfolio.”
I call it passive in that you just purchase these positions and leave them alone and not trade them.
I call it aggressive as it involves a basket of 2x leveraged ETFs issued by ProShares, based in Bethesda, MD (click here for their link).
The volatility of this portfolio will be higher. But the returns will be double what you would get with an index fund, and possibly much more. It is a “Do not open until 2035” kind of investment strategy.
Here is the makeup of the portfolio:
(ROM) –- ProShares Ultra Technology Fund - The three largest single-stock holdings are Apple (AAPL), Microsoft (MSFT), and Facebook (FB). For more details on the fund, please click here.
(UYG) – ProShares Ultra Financials Fund - The three largest single-stock holdings are Wells Fargo (WFC), Berkshire Hathaway (BRK.B), and JP Morgan Chase (JPM). For more details on the fund, please click here.
(UCC) – ProShares Ultra Consumer Services Fund - The three largest single-stock holdings are Amazon (AMZN), (Walt Disney), (DIS), and Home Depot (HD). For more details on the fund, please click here.
(DIG) -- ProShares Ultra Oil & Gas Fund - The three largest single-stock holdings are ExxonMobile (XOM), Chevron (CVX), and Schlumberger (SLB). For more details on the fund, please click here.
(BIB) – ProShares Ultra NASDAQ Biotechnology Fund – The three largest single-stock holdings are Amgen (AMGN), Regeneron (REGN), and Gilead Sciences (GILD). For more details on the fund, please click here.
You can play around with the sector mix at your own discretion. Just focus on the fastest growing sectors of the US economy which the Mad Hedge Fund Trader does on a daily basis.
It is tempting to add more leveraged ETFs for sectors that are completely bombed out, like gold (UGL) and commodities (UCD).
But it is likely that these despised ETF’s will move down before they move up, especially going into yearend.
There is also the 2X short Treasury bond fund (TBT) which I have been trading in and out of for years, a bet that long-term bonds will go down, interest rates rise.
There are a couple of provisos to mention here.
This is absolutely NOT a portfolio you want to own going into a recession. So you will need to exercise some kind of market timing, however occasional.
The good news is that I make more money in bear markets than I do in bull markets because the volatility is so high. However, to benefit from this skill set, you have to keep reading the Diary of a Mad Hedge Fund Trader.
There is also a problem with leveraged ETFs in that management and other fees can be high, dealing spreads wide, and tracking error huge.
This is why I am limiting the portfolio to 2X ETFs, and avoiding their much more costly and inefficient 3X cousins which are really only good for intraday trading. The 3X ETFs are really just a broker enrichment vehicle.
There are also going to be certain days when you might want to just go out and watch a long movie, like Gone With the Wind, with an all ETF portfolio, rather than monitor their performance, no matter how temporary it may be.
A good example was the August 24 flash crash when the complete absence of liquidity drove all of these funds to huge discounts to their asset values.
Check out the charts below, and you can see the damage that was wrought by high-frequency traders on that cataclysmic day, down -35% in the case of the (ROM). Notice that all of these discounts disappeared within hours. It was really just a function of the pricing mechanism being broken.
I have found the portfolio above quite useful when close friends and family members ask me for stock tips for their retirement funds.
It was perfect for my daughter who won’t be tapping her teacher’s pension accounts for another 45 years when I will be long gone. She mentions her blockbuster returns every time I see her, and she has only been in them for five years.
Imagine what technology, financial services, consumer discretionaries, biotechnology, and oil and gas will be worth then? It boggles the mind. My guess is up 100-fold from today’s levels.
You won’t want to put all of your money into a single portfolio like this. But it might be worth carving out 10% of your capital and just leaving it there.
That will certainly be a recommendation for financial advisors besieged with clients complaining about paying high fees for negative returns in a year that is unchanged, or up only 1%-2%. Virtually everyone has them right now.
Adding some spice, and a little leverage to their portfolios might be just the ticket for them.
